Deleveraging Will Take Over As Everyone Runs Out Of Ammunition
“A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets—-bonds, stocks, real estate and commodities alike—-is now deleveraging because of excessive risk and the price of money at the zero-bound. Although the recently reported fourth quarter GDP growth of 2.8% was the best of 2011, the underlying data was extremely weak. Furthermore, nominal GDP growth (before deducting inflation) was only 3.2%, down from 4.4% in the prior quarter as the implicit price deflator was only 0.4%, against 2.6% in the third quarter. Since capital spending growth generally follows consumer spending by a quarter or two, this segment is likely to remain tepid as well. Only 59% of corporations so far have beat fourth quarter earnings expectations, the lowest since the third quarter of 2008, while only 43% exceeded revenue forecasts, the lowest since the first quarter of 2008.
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